The Contested Economic Architecture of the Indo-Pacific Region

The Asia economic architecture is undergoing a process of reconfiguration. For much of the early 2000s economic cooperation efforts in Asia was bilateral, dominated by the negotiation of over 100 bilateral free trade agreements. But since 2010, a diverse set of new multilateral economic initiatives have been launched by regional governments. These promise an architectural shift for the Asian economic region, under which multilateral rather than bilateral institutions are used to liberalise trade, facilitate investment, and advance regulatory rule-making.

However, these multilateral initiatives are qualitatively differentiated, and can be classified into two broad models. One is a higher-ambition model, which seeks to advance economic integration through the making of new regulatory rules in areas traditionally excluded from the WTO (such as investment, services, and IP). This model is backed by the US and higher-income economies, and has an open membership approach targeted at all countries of the Indo-Pacific.

The other is a lower-ambition model, which instead uses traditional methods – tariff reduction and investment promotion – to foster greater regional economic integration. This model is favoured by China, India, and the lower-income members of ASEAN, and uses closed groups centred on the ASEAN+3 or +6. The table below summarises the principal features, and key multilateral institutions, of these two economic integration models.

While both model promise multilateral strategies for economic integration, they have divergent objectives, include different memberships, and offer distinct intergovernmental institutions. This competition reflects two ‘regional divides’ that characterise contemporary Asia. The first is an economic divide that partitions the region by development level, with higher-income countries favouring ambitious liberalisation strategies and lower-income ones more conservative traditional methods. The second is a geostrategic divide, which separates the US and those allied or aligned with it from China and its partners. Importantly, these economic coalitions are only loosely organised at present, and many key players – including India, Indonesia, Malaysia and Vietnam – are yet to commit decisively to either approach.

US regional economic leadership: From the Pivot/Rebalance to ‘America First’

Since the end of the Cold War, the US has played an important leadership role in economic regionalism in Asia. The Pivot/Rebalance to Asia policy of the Obama Administration intensified this trend. Particularly significant was the Trans-Pacific Partnership (TPP), which was widely labelled the ‘economic wing’ of the Pivot. Beyond the particular rules which it sought to advance, the TPP also signalled to regional governments – including both friends and rivals – that the US was committed to both security and economic leadership in Asia.

The Trump Administration has brought most forms of regional economic engagement, let alone leadership, to an end:

US withdrawal from the TPP significantly compromised efforts to create new trade and investment rules.

Explicit threats against NAFTA do not directly harm Asian partners, but have stoked fears the US may use coercive trade diplomacy even against its friends.

The vaguely-defined ‘America First’ trade policy excludes participation in nearly all regional trade agreements, as few are likely to deliver the desired trade surpluses to the US given existing patterns of comparative advantage.

The Trump Administration has yet to substantively execute the trade threats promised against China during the 2016 election campaign; but if this does occur will further diminish regional perceptions of the US as a responsible economic partner.

Like-minded countries have attempted to sustain momentum behind the high-ambition model in the US’s absence. The most visible were efforts to secure a ‘TPP-11’ agreement during the ‘summit season’ of late 2017. Unfortunately, these efforts failed in the face divisions amongst the remaining members. Without the anchoring provided by the US – whose economy accounted for two-thirds of the TPP bloc – it proved impossible to secure consensus behind a set of high-ambition regulatory reforms.

Reinvigorated attempts to secure the TPP-11 agreement may pay dividends in March this year, when the members intend to sign the ‘Comprehensive and Progressive Agreement for the TPP’. But the unequivocal message is that the high-standard model will face considerably tougher challenges absent US leadership.

In the meantime, efforts to realise the lower-ambition model continue apace. China has seized upon the election of the Trump Administration to make a renewed bid for economic leadership, declaring itself to be the new leader of globalisation and economic openness in the region. Negotiations for the RCEP agreement are ongoing, and despite roadblocks did gather pace in 2017. The Asian Infrastructure Investment Bank (AIIB) continues to grow its membership, technical capacity and loan portfolio. Belt and Road Initiative (BRI) investments continue to accrete. China is also in a leading position to link the BRI to sub-regional integration initiatives, such as the Masterplan on ASEAN Connectivity and Greater Mekong Subregion project.

Economic regionalism without US leadership? Short, medium and long-term risks

For the first time in three decades, the US is not an active player in discussions over regional economic integration in Asia. Yet its withdrawal comes at the very time when the regional economic architecture is changing most dramatically.

For likeminded partners such as Australia, Japan, Korea and Singapore, US absence poses three risks:

In the short-term, there is a risk that in-train initiatives fail to either gain traction or make progress. The experience of the TPP-11 in late 2017 illustrates this possibility. But other less-prominent, yet equally important, initiatives may suffer the same difficulties. Japan’s recently announced Free and Open Indo-Pacific initiative, reinvigorated efforts to fund infrastructure connectivity in a transparent and good governance manner through the ADB and World Bank, and the ongoing regulatory and policy dialogues managed by APEC, may also face stiffer headwinds. Without the soft leadership and hard material resources provided by the US, remaining members of the high-ambition coalition have less capacity to advance their preferred model.

In the medium-term, there is a risk that ‘undecided’ countries may decide to favour the lower-ambition model. The middle-income ASEAN members – Malaysia, Indonesia and Vietnam – are particularly relevant. These governments have offered qualified support to the high-ambition model. Yet they are also clearly frustrated by the US abandoning efforts it had spent several decades promoting; and see Trump’s unilateral threats against NAFTA and China as evidence of a more coercive US approach to economic diplomacy. If these countries are back the alternative from frustration and/or fear, they may be lost to the coalition supporting high-ambition economic reform.

In the long-term, it is possible that the lower-ambition alternative will take root and become the new regional economic architecture. The BRI is already transforming connectivity on the ground throughout the region, and is unlikely to slow given the large financial and political investments being made by the Xi Administration. If RCEP is completed and establishes the region’s first genuinely multilateral trade system, it will be much harder to make the case for a TPP-style agreement that has fewer members yet higher accession costs.

First-mover advantage applies to international institutions. If these low-ambition designs are established and become ‘architectural’, institutional lock-in will make it much harder for higher-ambition institutions to succeed.

In early 2018, these risks remain just that – risks. Medium- and longer-term risks will take time to be realised, while the short-term costs incurred during 2017 can still be mitigated. Governments, policy-makers and businesses from the high-ambition coalition now have an opportunity to develop and enact strategies that manage, and potentially neutralise, adverse outcomes. While uncertainty means the ideal form for such strategies remains a matter of debate, it is imperative that steps are taken now to ensure Australia, the US and likeminded partners can shape the newly-emerging Asian economic region.

Authors

Jeffrey Wilson

Head of Research

Dr Jeffrey Wilson is the Head of Research at the Perth USAsia Centre. He provides leadership and strategic direction in developing and managing the Centre’s research programs across its publications, policy and dialogue activities.